Comparison & Review of Top High-Yielding Debt Options for Investors

Understanding High-Yield Debt Investment Options

Fixed Deposits & low-risk Debt Mutual Funds, offer safety to investors but only provide a relatively low yield/interest-rate. Traditionally, equity is the recommended route for investors seeking higher returns, but not all investors are comfortable with the shorter-term volatility that is inherent to the equity asset class.

In recent years, with the growth of the AIF industry in India & the development of the secondary market for corporate bonds, a number of interesting new investment options have emerged that offer investors higher-returns than traditional debt options but without the shorter-term volatility inherent to equities.

In this blog post, we evaluate the relative merits of these various high-yield debt options, and their appropriateness for different types of investors.

Pros of High-Yield Debt

Higher returns than traditional debt
Attractive for investors not comfortable with equity volatility
Attractive for investors that cannot invest in equities due to their investment mandate

Cons of High-Yield Debt

Higher risk than traditional low-risk debt funds
Some part of excess returns may be subject to assumptions of growth in value of an underlying asset

High-Yield Debt AIF's

Pure High Yield Debt AIF's

The first category of high-yield investment options, are relatively easy to understand. These are essentially funds that invest in traditional debt securities, but typically lend to borrowers who are unable to borrow from banking channels at low-interest rates (thus leading to the higher interest-rates that these funds enjoy). These funds offer investors a higher yield, but this is accompanied by a higher inherent risk of default (credit risk) of the underlying papers.

Scheme	Gross YTM	Net Pre-tax YTM	Target Borrower Credit Rating	Target Borrowers	Quick Description
ASK Real Estate Special Situation		10-13%	A to BBB	Residential Developers in Top-6 Cities	Fund specializes in high-yield credit investments, primarily targeting residential developments in India’s top six cities: NCR, MMR, Pune, Bengaluru, Chennai, and Hyderabad. By prioritizing fully approved projects and replacing existing lenders, the fund aims to capitalize on development-stage and distressed opportunities.
Unifi High Yield		12-14%	A to BBB	A to BBB-rated corporates	Unifi High-Yield invests in a diversified mix of high-yield debt (~70% of portfolio. A to BBB rated corporates), Blue-chip Debt (~20% of portfolio) and corporate event arbitrage/select equity deals (~10% of the portfolio). Unifi High Yield has the longest track record amongst any of the high yield funds in this list.

Asset-Backed Yield Funds

The second category of high-yield options, typically invest in physical assets that offer an annual rental yield, and where returns are boosted by an expected gain from capital appreciation of the underlying asset at the time of the sale of this asset by the fund (helping boost returns, in a tax-efficient manner). These funds offers investors a higher yield, but a part of this expected higher yield is dependent on the capital appreciation of the underlying asset actually playing out.

Absolute Return Long-Short AIF's

AIFs that follow a long-short strategy, invest in a combination of long positions (via either equity shares or equity derivatives) and short positions (taking a short or selling position in a stock, via equity derivatives). The broad aim is to go long stocks that are expected to move up, and short stocks that are expected to move down. Absolute Return Long-short funds typically have a lower net-exposure (gross long minus gross short) to equities, and accordingly are in a position to deliver returns regardless of market conditions and with substantially lower volatility than pure equity funds.

Scheme	Target Net Long	Closest Hybrid MF Category
Avendus Market Neutral	~ 0%	Conservative Hybrid
Avendus Absolute Return AIF	15% to 20%	Conservative Hybrid
Tata Absolute Return	-20% to 35%	Dynamic Asset Allocation
Alta Cura Absolute Return	0-10%	Equity Savings

Direct Investments in Bonds

Investor’s also have an option to invest directly in bonds (which IME Capital can facilitate), either via investing in primary issuances of bonds or by investing in them in the secondary markets.

Yields on these bonds are dependent on the maturity & the perceived credit-risk of the borrower.

Hybrid Mutual Funds

While not technically debt mutual funds, certain lower-risk hybrid funds – such as Conservative Hybrid Funds (~20% equity exposure) & Equity Savings Fund (~33% equity exposure) may also be considered by investors seeking investments with returns higher than normal debt but without taking on too much incremental risk.